4 Reasons To Start Using A Roth IRA In 2018

If you want a more secure financial future and retirement, it is time to consider using a Roth IRA. Unfortunately, most people don’t. Roth IRAs remain a vastly underutilized retirement savings and investment vehicle. Instead, most people tend to rely on a traditional IRA or 401(k) account. They may not realize that a Roth IRA can offer tax benefits, access to funds, ease of use, and retirement income benefits that are too attractive to ignore. Noting the many advantages of a Roth IRA, Clarisa Hernandez, CFP®, ChFC®, an associate partner at North Star Resource Group, states that “Roth IRAs are incredibly helpful to my clients in a variety of ways. I have been able to utilize Roth IRAs to help my clients buy homes, save for retirement, start a business, and create security for their children.” In short, Roth IRAs allow you to save for retirement and receive tax-free investment returns, while retaining access to your funds if and when you need them.

How do you save in a Roth IRA?

A Roth IRA is a tax-advantaged savings vehicle designed for retirement investments. A Roth IRA is funded with after-tax contributions, meaning you do not get any tax-deduction for contributing to the account. Your contributions are then invested in an investment that you select, such as stocks, bonds, or mutual funds. Once these investments grow in value, you can receive the investment gains tax free, which is an attractive benefit of the Roth. According to the 2018 tax rules, you can invest up to $5,500 a year in a Roth IRA; if you are over age 50, you can put an additional $1,000 into a Roth IRA for a total of $6,500. This amount can be contributed for each spouse, even if only one spouse is working, assuming the spouses are filing joint returns. Setting up a Roth IRA can be accomplished rather quickly. It can be started online with companies like Vanguard or Fidelity, or initiated with a financial advisor through most large financial institutions.

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While you cannot contribute to a traditional IRA after age 70.5, there is no age limitation on contributing to a Roth IRA, meaning you can contribute after you are age 70.5. Additionally, Roth IRAs can be set up for minors who have some earned income of their own. If you have a child who is working during summers, you could help them set up a Roth IRA and sock away some investments. While you do need income to contribute to a Roth, there are some limits. If you earn too much money in a particular year, you might not be allowed to contribute to a Roth IRA for that specific year. In 2018, for single filers, your ability to contribute to a Roth phases out once you hit $120,000, and completely maxes out at the $135,000 level. For those married and filing jointly, the phase-out range for Roth IRA contributions is $189,000 to $199,000. The income limits in 2017 were slightly lower, $186,000 to $196,000 for married filing jointly, and $118,000 to $133,000 for single filers. Also, you can contribute to a Roth IRA in addition to your 401(k) each year, it’s not an either or decision. Most working Americans earn under those limits and are eligible to contribute to a Roth IRA.

What are the benefits of a Roth IRA?

Tax-Free Growth: The main benefit of a Roth IRA is that your investments grow tax free. However, you do need to meet a few conditions to receive the investment growth income tax free. First, you need to have had a Roth IRA in existence for at least five years. Second, for a tax-free and penalty-free distribution of investment gains, one of the following conditions needs to be met: reach age 59.5, death, disability, or $10,000 of qualified first time home-buying expenses.

Access to Funds: While tax-free growth is fantastic, there are additional benefits of a Roth IRA. One of these benefits is the easy access you have to your own contributions to the Roth IRA. For instance, if you put $5,000 dollars into a Roth IRA, invest it in stocks, and the value grows to $10,000, you can still withdraw your initial investment of $5,000 at any time without paying income taxes or penalties. This is because Roth IRA withdrawals allow you to withdraw your contributions first before having to tap into any of the investment gains. This is a great feature that does not exist with a 401(k) or traditional IRA, because withdrawals of contributions to deductible accounts typically generate income taxes owed and a penalty tax of 10 percent if the withdrawal takes place before age 59.5. This Roth IRA feature gives people more access to their own money, more liquidity, and more flexibility. In fact, a Roth IRA can serve as a type of emergency fund. (See Roth IRA Does Double Duty as Emergency Fund and Retirement Account).

Lower Taxes in Retirement: Roth IRAs also offer great tax savings in retirement. Because Roth IRA withdrawals of both contributions and investment gains are income tax free when taken in retirement, they do not increase a retiree’s tax liability, tax rate, Medicare premiums, or Social Security taxes. The tax-free nature of Roth IRAs can be very beneficial. As Clarissa explains, “I recently had a client who is in retirement and wanted to pay cash for a vehicle so she wouldn’t incur another monthly debt payment that would put a strain on her retirement income. By having funds available in a Roth IRA to use, we didn’t have to pull additional money from her taxable retirement accounts. Having tax-free access to Roth IRA savings helped her save around $10,000 in taxes.”

No RMDs: Another benefit of a Roth IRA is that the account balance is not subjected to required minimum distributions after the owner of the account reaches age 70.5. Most other retirement accounts, like the 401(k) and traditional IRAs, are subject to required minimum distributions. A Roth IRA means that seniors have more control over when they spend their money, and are not forced to take withdrawals. This also allows the money to remain invested and to continue to grow in a tax-free vehicle for a longer period of time.

Roth IRAs offer a number of tax benefits, retirement savings opportunities, and liquidity benefits that often go underappreciated. Remember, you can still set up a Roth IRA for 2017 by contributing before the tax return due date in April. Don’t think it is too late to start using this valuable savings vehicle. If it all feels a bit overwhelming, find a good financial advisor who can help you set up a plan and invest for your future with a Roth IRA.

Follow me on Twitter at @RetirementRisks, check out my retirement book - Rewirement on Amazon here, or my website at HopkinsRetirement.com or my research at www.carsonwealth.com